Alternative Business Structures (ABS) in Scotland are to get equality with those in England & Wales.
This was announced on 22 December 2022 as part of the Scottish Government’s response to the findings of the legal services regulation reform in Scotland consultation analysis report [PDF].
It was also announced before the first ABS has even been formed in Scotland!
ABS in Scotland and the Legal Services (Scotland) Act 2010
The Legal Services (Scotland) Act 2010 (enacted on 9 October 2010) introduced for the first time the concept of Alternative Business Structures in Scotland.
It took over 11 years for a scheme for licensed legal services providers to be adjusted and approved and then for appointment of the Law Society of Scotland as an approved regulator. That appointment was announced on 22 December 2021. However, the scheme still has to launch. The Law Society’s press release from December 2021 stated:-
The Society is currently building the policies and processes that will support the approved regulatory scheme, which is due to launch in 2022.
Over a year after the Law Society of Scotland became an approved regulator and we still await the launch. Looks like that will now be in 2023, at the earliest, rather than 2022. So still no Alternative Business Structures in Scotland 12 years after the Scottish Government provided for their existence.
Pause after Pause
At a meeting at the Royal Faculty of Procurators in Glasgow on 13 October 2022 the Chief Executive of the Law Society of Scotland, Diane McGiffen, indicated that the Society had put a pause on the launch.
This was apparently due to the announcement by the Scottish Government on 6 September 2022 to introduce a Legal Services Regulation Reform Bill in 2022/23.
The Bill might affect ABS and the Society wanted to know what the detail was!
I pointed out how ridiculous this was. Provisions in an Act from 2010 are still not (12 years later) implemented by the Law Society of Scotland. Those provisions should be implemented as enacted.
It was not for the Law Society to pause the process to consider what effect possible future legislation may have on the existing unimplemented legislation. It was yet another example, in a long history of them, of the Law Society of Scotland dragging their heals when it comes to the introduction of ABS.
The 51% Rule for ABS in Scotland
However, even when launched and ABS become a reality in Scotland, under the Legal Services (Scotland) Act 2010 there is the 51% rule.
This rule means that 51% (i.e. a majority stake) of the legal services business must be held by regulated professionals. This differs from the model in England and Wales, where solicitors and barristers are able to operate in a variety of business structures that their Scottish counterparts are not.
The Consultation Analysis
The Scottish Government’s Consultation sought views on removing the 51% majority stake rule.
The Consultation Analysis states that:-
There was a clear divergence of views for this question. Of those who indicated their level of agreement, just over half (52%, n=39) agreed that the 51% majority stake rule for Licenced Legal Services Providers should be removed, compared to 48% (n=36) who disagreed.
Although when looking at these percentages you have to be careful to remember that, as mentioned by me in an earlier blog post, the Consultation Analysis highlighted that:-
there was evidence of coordination of responses. Mostly, this was respondents supporting the Law Society of Scotland’s organisational response.
Which possibly and maybe unrealistically adds more into the disagree camp (the Law Society of Scotland were of the view that the Scottish Government should wait and see how ABS worked under the 2010 Act before revisiting the 51% rule!).
The Scottish Government’s Response on ABS in Scotland
The Scottish Government state in their response:
We agree on the need to liberalise alternative business structures (ABS), removing restrictions which under the Legal Services (Scotland) Act 2010 currently require such firms to operate for ‘fee, reward or gain’, and which require to have a minimum ownership of 51% by regulated professionals.
This would allow greater flexibility in respect of ABS, to address concerns that Scottish legal firms are at a competitive disadvantage compared to other jurisdictions.
The Competition and Markets Authority (CMA) market research report on legal services in Scotland set out that there is limited empirical information available on the impact of ABS, though there has been recent evidence from the experience in England and Wales. It stated that the ABS framework in England and Wales differs in some respects to the framework in Scotland and is less restrictive. The CMA report highlights that in England and Wales the legislation allows for the ownership of an ABS to be completely open, subject to meeting certain suitability requirements, and that ABS are available to the non-profit sector. Since ABS were introduced in England and Wales in 2007, almost 1,300 ABS have been established. These include non-profit ABS. The CMA view that the adoption of ABS in other jurisdictions illustrates that they have an important role to play in breaking down the regulatory restrictions on business models, with little apparent downside. It has also been reported that the Solicitors Regulatory Authority in England and Wales view that there is little evidence that non-lawyer ownership has increased professional risk.
Our view is that liberalisation should allow for:
- Employee and community ownership of ABS legal entities.
- Greater potential for outside investment into ABS, to address concerns that the Scottish legal sector is at a competitive disadvantage compared to other jurisdictions.
- Third sector organisations to directly employ legal professionals to undertake what is currently reserved activity, such as court proceedings.
This is very sensible and good news. Possibly the most significant part of the Scottish Government’s response in achieving actual meaningful regulatory reform.
Hopefully, it won’t be another 12 years before these proposed amendments become a reality.
It should be pointed out, again, that we do not require primary legislation to achieve it. Scottish Ministers can do so by regulation (under Section 147(1) of the Legal Services (Scotland) Act 2010). There is no need to wait for a new Legal Services Act.
Update – 30 April 2023
The Regulation of Legal Services (Scotland) Bill was introduced to the Scottish Parliament on 20 April 2023. Whilst it was anticipated that it would do away with the 51% rule, unfortunately it only reduces it – to 10%. There is no good reason for retaining this rule at any percentage and I discuss this today in my post on being ambitious in regulatory change.
More Blog Posts on the Scottish Government’s Response
There are five Blog Posts on the Scottish Government’s response:-
- Legal Services Regulation Reform Elephant left in the Room
- Legal Tech Sandboxes
- ABS in Scotland to get Equality with England & Wales (i.e. this blog post)
- Legal Complaints Reform in Scotland
- Protection of ‘Lawyer’ and other Regulatory Reform Bits and Bobs
Blog Posts on Legal Services Regulation Reform
For all blog posts on this topic see: Legal Services Regulation Reform in Scotland
Reactions on Social Media to ABS in Scotland to get Equality with England & Wales
On LinkedIn the following comments have been made:-
Michael Burne (I love helping people to start, grow and exit their law firms. Like taking photos too.):
Given the slow pace of change in England & Wales since ABS came into being you’re not that far behind Brian. Plenty of time to catch up and overtake – remember the tortoise and the hare!! After all you’ve been innovating without ABS yourself for a just a little while eh?
True Michael. Although Mitch Kowalski does say in ‘The Great Legal Reformation: Notes from the Field’ :-
“It’s hard not to notice the marked difference between Inksters operating in Scotland’s traditional regulatory environment, and gunnercooke, which has taken advantage of England’s more enlightened approach to legal services regulation. Both have found success with virtually (pun-intended) identical models, but one can’t help but feel that Brian Inkster (and by extension a new generation of Scottish lawyers) is being unnecessarily held back from greater success by Scotland’s antiquated regulatory regime, which encourages short-term thinking by forcing lawyers to fund all innovation from firm revenue or personal loans.”
At least The Scottish Government levelling the playing field gives options with no obligation of taking them up. There will, of course, be cons as well as pros to the ABS route.
Any existing law firm in Scotland will have to think carefully of the actual benefits, if any, to them becoming an ABS.
Most law firms in England & Wales decided to stay in their traditional structures.
Indeed Brian. Perhaps now the way is clear for a North / South combo to rival the southern “powerhouses”…
Helen Burness (⚡️Marketing for legal founders ⚡️ Social media, personal branding, LinkedIn ⚡️ Lawbreaker ⚡️ SEND parent ⚡️Changing outdated narratives one at a time…):
ooh I like it
Iain Buchan (Dispute Resolution Solicitor | Notary Public (Scotland) | Thorntons Law LLP | ACIArb):
I agree. The 51% rule is not useful and discourages the use of ABSs (even if they were possible). I know of a couple of firms in England that are looking to expand but don’t want to set up a separate entity.
Indeed Iain. And this could work in the opposite direction with Scottish firms wanting to expand south.
Graeme Johnston (Software to map work – before that a lawyer):
Brian are there regulatory restrictions at the moment on Scottish firms expanding south? I just had a look at the S&W website, and the London office seems to be part of the Scottish firm, though the Dublin office is a separate Irish entity – https://shepwedd.com/legal-notices-and-complaints-procedure
Don’t think so. I was meaning a Scottish ABS not having to form a separate entity and vice versa. I don’t know the ins and outs of a traditional structure moving south. I think there is regulation under each jurisdiction but one regulator takes the agreed lead in regulating.
I think the only major restriction is the requirement for a Head of (or Compliance Officer for) Legal Practice to be a regulated individual in that jurisdiction. But the Head of Finance, does not require to be a lawyer.
Thanks Iain for clarifying that.
Graeme Johnston (Software to map work – before that a lawyer):
Reading the key sentence (second bullet point of para 48) I found it unclear –
– it refers to ‘greater potential’ for outside investment in ABSs generally but doesn’t say if that means 100% ownership or something less.
– my guess is that they envisage something less, because of the contrast with the first bullet point, which refers to ‘ownership’ of ABSs by staff or communities
– it’s also a contrast with the language used in para 47 to describe the E&W position (‘completely open subject to meeting certain suitability requirements’)
I didn’t interpret para 48 to be key with regard to removing the 51% rule. I took that as read from para 45 and 46 :-
“45. We agree on the need to liberalise alternative business structures (ABS), removing restrictions which under the Legal Services (Scotland) Act 2010 currently require such firms to operate for ‘fee, reward or gain’, and which require to have a minimum ownership of 51% by regulated professionals.
46. This would allow greater flexibility in respect of ABS, to address concerns that Scottish legal firms are at a competitive disadvantage compared to other jurisdictions.”
If “removing restrictions” then that is surely the 51% rule in its entirety especially “to address concerns that Scottish legal firms are at a competitive disadvantage compared to other jurisdictions” as any disadvantage would still remain with any percentage variation involved other than complete removal.
“Greater potential” in para 48 whilst, I agree, is a bit unclear surely is linked to the complete removal of the 51% rule which only really then will produce that “greater potential”.
I hope I have not got over excited and what we are going to see is the complete removal of the 51% rule and not another fudge of some sort!
I hope you’re right but to me it still reads as if fudge is possibly on the menu! Maybe worth asking your MSP to seek clarification?
Probably “fudge on the menu” is an inherent skill for anyone writing Scottish Government dispatches!
Patrick James Mc Neill (On a professional mission to maintain my own VISION ~ Freelance Solicitor (England & Wales) SRA number *418752 – Dual qualified and admitted to North of Ireland jurisdiction August 2019):
Celtic Fringe upgrade – LSNI in Belfast wil just Luv this Mr Inkster. Will blow their minds – can’t wait to see the reaction. Not as if it all wasn’t as predictable as the sun rising in the East…a decade late of course – power for the course…
I am unfamiliar with the position in NI. I assume from what you say that they are even further behind us in Scotland when it comes to ABS? Not even started to contemplate it perhaps?
Patrick James Mc Neill:
Brian Rogers FCMI (Regulatory Director, The Access Group (Legal Division)- helping law firms and lawyers meet their regulatory and compliance obligations. Lawtech founder. Veteran.):
Many of those who work within E&W ABSs don’t seem to realise the severe penalties that could be imposed if they get things seriously wrong, namely, £250m for the ABS and £50m for individuals; having an ABS is not just about taking advantage of the freedoms it offers but also accepting it comes with enhanced sanctions!
I have worked with a number of newly created ABSs in the past and it came as bit of a shock to the non-lawyer owners to realise the size of the sanctions they could face now they were regulated by the Solicitors Regulation Authority!
Why the difference between ABS and a traditional law firm? Why should one be penalised more than the other for wrongdoing? Appears illogical and unfair.
Blame the Legal Services Act; it was envisaged that the likes of Tesco (hence why Tesco Law came into being, although it has kept well clear) would start offering legal services and there needed to be a heavy enough deterrent for such big organisations that may have wanted to do the wrong thing!
Is the size of the penalty linked proportionately to the size of the organisation?
The fines currently levied take into account the turnover or income of firms and individuals.
The SRA is ultimately looking to bring fines for private firms in line with ABSs, and this is supported by some in government; on the basis that AML fines are likely to be unlimited in due course it would not surprise me if the SRA gets its wish of unlimited fines, especially if it also gets granted its other wish of becoming the sole legal sector regulator in E&W!
Thanks Brian. Very informative.
You might find this useful Brian –